The Age Of Debt
Barak Obama's first budget promises "fiscal responsibility" - and delivers the opposite.
by Veronique de Rugy | June 2009
Beware when politicians promise “fiscal responsibility.” It’s pretty much a guarantee that every word that follows the phrase will be a lie. President Barack Obama’s first budget, entitled An Era of New Responsibility: Renewing America's Promises, is no exception to this rule. Every page comes with a promise to end budget tricks and save money by reforming procurement and cutting various types of waste, but the actual plan boosts spending and deploys gimmicks galore. If this is a new era, it’s one made of debt.
Promise No. 1: “While we have inherited record budget deficits and needed to pass a massive recovery and reinvestment plan…we must begin the hard choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our nation on sound fiscal footing.”
In fiscal year (FY) 2009, the deficit is projected to be $1.75 trillion. This amount is equal to the entire budget of the United States in FY 2000. The deficit represents 12.3 percent of gross domestic product and results from the federal government spending $3.9 trillion—an increase of 32 percent over 2008—while collecting less than $2.2 trillion in revenue. Most tellingly, the public debt stands at 58.7 percent of GDP, compared to 40.8 percent in 2008.
It is true, as Obama says, that he inherited most of the FY 2009 deficit. It was George W. Bush, with the support of most Republicans in Congress, who engineered a series of expensive bailouts and the federal takeover of the mortgage companies Fannie Mae and Freddie Mac. But it didn’t take long for Obama to add his own billions (see table): $789 billion in “stimulus” (25 percent of which will be spent in 2009), a promise to spend at least another $250 billion to “rescue” more financial institutions, and so on.
To fulfill his promise of “fiscal discipline,” the president would have to shave billions off the federal budget. Yet there are no real program cuts in his budget. Instead the president proposes to dramatically boost health care spending and add many new subsidies for energy companies, students, broadband Internet service, highspeed rail, and low-income Americans.
The result is an expansion of the federal government that will persist long after the current spike of stimulus and bailout spending. Based on government data and Obama’s proposed outlays through 2019, Figure 1 shows the dramatic increase in nonmilitary spending as a percentage of gross domestic product between 1990 and 2019. In 2019 nonmilitary spending would reach 17 percent of GDP. That’s 30 percent higher than at the end of the Clinton years.
And this chart understates Obama’s vision. First, it includes only a down payment for his forthcoming health care plans. Second, it assumes that “temporary” stimulus spending actually will be phased out. Which is not happening. Take the Environmental Protection Agency: Do we really believe that after getting a 92 percent increase in the “stimulus” and a 33.9 percent increase in 2010, the agency will let its budget increase drop to 0.7 percent in 2011?
Promise No. 2: “This budget does begin the hard work of bringing new levels of honesty and fairness to our government. It looks at a full 10 years, making good faith estimates about what costs we would incur; and it accounts for items that under the old rules could have been left out, making it appear that we had billions more to spend than we really do.”
To the president’s credit, this budget does contain some positive changes along these lines. For instance, it includes a number of items that the previous administration did not include in the regular budget, such as the cost of the Iraq war.
But the document is not free of tricks. First, Obama told Congress his budget team has “already identified $2 trillion in savings” to help tame record budget deficits. About half of those “savings” come from proposed tax increases. And the administration lists as “savings” until 2019 the annual $170 billion cost for Iraq, totaling nearly $1.5 trillion. Yet even the Bush administration planned on getting out of Iraq by 2012. Cutting spending that was not going to occur isn’t saving; it’s dissembling.
The president’s budget also claims cuts in discretionary spending by merely shifting several programs from one category of spending to another. One example is Pell Grant funding ($116 billion over 10 years), which is converted from a discretionary program to an entitlement. A recent memo from the House Budget Committee explains that “if these accounting changes were not applied, and the spending continued in the discretionary portion of the President’s budget, non-defense discretionary spending would be…$18 billion higher in 2009 [than what the administration claims] and $24 billion higher in 2010, and would rise to $34 billion higher in 2019.”
Finally, the budget relies on utterly unrealistic economic projections. Obama projects that the economy will be growing by 3.4 percent next year and by 6.2 percent in 2012. Those figures are several percentage points higher than any other reputable forecast.
Contributing Editor Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.
As a side note the graphics did not come out too well when they were placed to fit, just click on them and you can view them at full scale.